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What are Common Stocks?

A common stock is a type of security that represents individual ownership in a corporation. Common shareholders generally have a right to the company’s profits and may enjoy voting rights on crucial corporate decisions. Long-term, common stocks tend to yield higher returns than preferred stocks or bonds, but also carry more risk.  

🤔 Understanding common stocks

Common stocks, also called common shares, ordinary shares, or voting shares, represent a slice of ownership in a corporation. Owning common stock typically grants shareholders certain benefits like the right to vote on corporate matters and receive company profits. As an investor, you can buy common shares on exchanges like the NYSE and NASDAQ. 

Common stock and company profits

Common stocks grant “residual ownership” over corporate profits after all expenses are paid. However, stockholders may not receive this value directly. While some companies pay out a portion of their  profits as dividends, others hold or reinvest their profits in company activities. 

Common shareholders also have a right to distributions during bankruptcy or liquidation proceedings. However, they’re not the only ones. As the lowest owners on the corporate ladder, common stockholders receive what’s left (if anything) after suppliers, creditors, bondholders, and preferred shareholders receive their dues.  

Voting rights

Common shares often grant voting rights, allowing shareholders to make their preferences known on:

  • Board of director nominees
  • New policies and management decisions
  • Mergers or acquisitions
  • Stock splits and dividends

Generally, common stocks grant one vote per share, though that may vary between companies. Certain companies offer different classes of shares with preferential voting rights, often for founders and other insiders to maintain control.

Price appreciation

Common stock doesn’t just grant shareholders a claim on company profits – the shares themselves can be valuable. 

Depending on market conditions, shares tend to appreciate (go up) when companies do well and depreciate (go down) when companies flounder. This potential for price appreciation represents a chance to profit off the company’s success independent of potential dividend payouts. 

Differences between common stock and preferred stock

Preferred stocks, or preferreds, are another type of stock that companies may issue. Preferreds blend several features of bonds and common stocks to present a unique type of security. 

Just like common stocks, preferreds trade on exchanges and have the potential for price appreciation. Additionally, they often pay out dividends, and they rank below debt and most other obligations when it comes to liquidation payouts. 

Unlike common equity and similar to bonds (and other forms of debt), preferreds may have a maturity date or call option. The company can use these opportunities to repurchase preferreds at a set price, rather than the current value. Additionally, their dividend payouts are often substantially higher than common stocks’ dividends. 

Common shares do have a few advantages over preferreds. For one, they’re more common with greater liquidity and appreciation potential. And, while most common shares come with voting rates, preferreds rarely do. 

What this means for you

As an investor, common stocks probably represent the largest slice of your portfolio. Depending on your preferences and risk tolerance, you can invest in many types of common shares, including:

  • Growth or momentum stocks
  • Value stocks
  • Large-cap stocks
  • Small-cap stocks

One of the best ways to ensure you get the most out of your portfolio is through diversification. Buying several types of common stock (and other assets) across multiple industries lets you capitalize on growth while minimizing risk. 

However, no matter how well you diversify your holdings, stocks are typically riskier than other investments like bonds. But because they’re highly liquid, widely available, and based on the value of an underlying company, they’re a familiar and comfortable option for many investors.

Disclosures

Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.

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